Newsom’s budget proposal abandons key homeless and housing programs; maintains funding for key climate and infrastructure initiatives

Here are the biggest wins and losses for cities in the Governor's January budget proposal

By Cal Cities Staff

One of Gov. Gavin Newsom's favorite budget truisms usually takes some form of "values are reflected in our investments." But his budget proposal today calls into question what those values are and how deep his commitment runs when it comes to resolving some of the state's most intractable problems.

Earlier this week, Newsom eschewed his normal annual budget presentation to give what he described as a preview on Monday. That left Department of Finance Director Joe Stephenshaw in the hot seat on Friday, as he unveiled a $322.2 billion spending proposal for the upcoming fiscal year.

The budget maintains or increases commitments made in last year's budget for major climate change and infrastructure initiatives, thanks in part to a modest budget surplus of $363 million and a voter-approved $10 billion climate bond. But the budget falls noticeably and dramatically short on housing and homelessness.

"Time and time again, surveys show that homelessness and housing costs are a top concern for residents throughout California," said Cal Cities Executive Director and CEO Carolyn Coleman in a statement. "In addition, recent federal and state reports demonstrate that targeted and sustained funding reduces homelessness. That's why it is disappointing that the Governor's 2025-26 budget proposal fails to include any new funding for the Homeless Housing, Assistance and Prevention Grant Program and affordable housing programs.

For new budget watchers, a sudden surplus might sound surprising after two years of deficits. But California's progressive tax system depends heavily on stock market gains, which have increased due to a bullish outlook on chipmakers and large tech companies.

Newsom has pointed out that could change in the coming months if the incoming federal administration delivers on campaign promises, such as new tariffs. Newsom and others are also already figuring out how to fund what is likely to be another round of bruising legal fights, many centered on the state's environmental policies.

Then there's the matter of the wildfires raging in Southern California. The Federal Emergency Management Agency has agreed to cover much of the costs. However, the process for securing such reimbursements can be lengthy even under friendly federal administrations. And many of those affected communities are covered by the state's last-resort FAIR Plan.

Figuring out what your values are can be hard in flush years. It's even harder during uncertain years.

-Brian Hendershot, Cal Cities Advocate Managing Editor

Revenue and Taxation

This year's $322.3 billion state budget is a noticeable increase from the year prior, which came in at approximately $297 billion and addressed nearly a $47 billion deficit. The 2025-26 State Budget maintains $16.9 billion in reserves and boasts a modest surplus of $363 million.

This is in slight contrast with the Legislative Analyst's Office (LAO), which projected a deficit of approximately $2 billion and ongoing out-year deficits of $20-$30 billion. Department of Finance Director Joe Stephenshaw noted that the administration and the LAO are largely aligned in how they view revenues.

The LAO previously stated that the state has no capacity to expand existing programs. Stephenshaw noted the state will limit commitments and new investments in existing programs. He also said that natural disasters could lead to tax filing delays, like the ones from two years ago that resulted in significant revenue estimate misses.

The budget proposal avoids drastic budgetary solutions (cuts, delays, and deferrals), as last year's budget was a de facto two-year budget with already enacted budgetary solutions that sought to balance the 25-26 budget. However, the Governor warned against too much optimism, as California's progressive, but volatile tax structure relies on the top 1% of earners.

Newsom on Monday also called for fiscal reforms that will need to be approved by the voters - specifically changes to 2014's Proposition 2 and 1979's Proposition 4, both of which deal with the state's budget reserves. He wants to double the budget reserve cap from 10% of General Fund dollars to 20% and make reserve contributions not considered an expense under the Gann Limit. He emphasized that he would refrain from passing any new taxes, barring any seismic change or action from the federal government that has a significant impact on the state.

- Ben Triffo, legislative affairs lobbyist

Environmental Quality

The Governor's budget proposes $2.7 billion for the first year of a multi-year expenditure plan to implement a $10 billion climate bond (Proposition 4). The budget acknowledges that policymakers need to continue to prioritize extending the cap-and-trade program beyond 2030 to support the state's carbon neutrality goals, as well as address energy affordability through a suite of actions to meaningfully reduce electric bills.

The proposed budget will infuse significant Prop. 4 funding into various climate and environmental programs in the following areas:

Safe drinking water, drought, flood and water resilience

• Water quality and safe drinking water and tribal water infrastructure. $183.2 million for grants and loans that improve water quality and help provide clean, safe, reliable drinking water, such as remediation of PFAS or "forever chemicals" substances, and the implementation of drought and water shortage contingency plans, among other critical groundwater and safe drinking water projects.
• Flood management. $173.1 million for flood control projects to evaluate, repair, rehabilitate, reconstruct, expand, or replace levees, weirs, bypasses, and facilities of the State Plan of Flood Control.
• Water reuse and recycling. $153.4 million for water reuse and recycling projects that support treatment, storage, conveyance, or distribution facilities for potable and non-potable use and more.
• Salton Sea Management Program. $148.2 million to implement the Salton Sea Management Program 10-year Plan and deliver projects that reduce dust emissions -benefitting air quality and public health - and restore environmental habitat.
• Additional water investments. $173.5 million in non-Prop. 4 spending to improve water storage, groundwater replenishment, and conditions in streams and rivers; $21.9 million from Prop. 4 for various flood management system projects in the Central Valley, including $8 million for Systemwide Flood Risk Reduction projects and $13.9 million for the Urban Flood Risk Reduction Program, and an additional $147.6 million in Prop. 4 spending for the Salton Sea Management Plan.

Coastal resilience

• Coastal resilience. $30.8 million for projects to protect coastal lands, public access facilities, and habitats, as well as $20 million for projects that address sea level rise, flood management, and wetland restoration, consistent with the San Francisco Bay Restoration Authority Act or the San Francisco Bay Area Conservancy Program.
• Sea level rise mitigation and adaptation. $20.3 million for the planning and implementation of projects that help communities prepare for the impacts of sea level rise and coastal flooding, along with $7.5 million for grants to increase the resilience of coastal ecosystems and protect marine wildlife.

Biodiversity and nature-based solutions

• Protect and enhance fish and wildlife resources. $176 million for land conservation acquisitions and easements, habitat enhancement and restoration, floodplain reactivation and wetland restoration, and wildlife connectivity.

Clean air and energy

• Offshore wind generation and other port upgrades. $228.2 million for port upgrades, including construction and improvements of publicly owned port facilities to support the development of offshore wind generation activities.
• Demand-side grid support program. $50 million for load reduction and backup generation efforts that support electric grid reliability during extreme weather events.

For additional climate bond funding, please see the Public Safety section for wildfire and forest resilience, the Community Services section for outdoor access and extreme heat mitigation, and the Transportation, Communications, and Public Works section for dam infrastructure safety.

- Melissa Sparks-Kranz, legislative affairs lobbyist

Community Services

When it comes to homelessness funding, cities are experiencing déjà vu. Just like last January, the Governor's proposed budget maintains funding committed in previous budgets but does not include any new funding to address homelessness. This comes as recent counts show homelessness continues to rise in California, reaching record highs last year. Rather than providing new funding to stem the tide of this crisis, the budget instead focuses on accountability policies targeting local governments' use of state funds.

Below is a breakdown of major allocations, reductions, and policies announced in the Governor's January budget.

Homelessness

• The proposed budget maintains $100 million for Encampment Resolution Fund grants committed to in last year's budget.
• The administration proposed the creation of a new California Housing and Homelessness Agency to create a more integrated and effective response to the housing and homelessness crisis. This agency will consist of the existing Department of Housing and Community Development (HCD) and the California Interagency Council on Homelessness, which are currently under the Business, Consumer Services, and Housing Agency.
• The budget does not commit to funding round seven of the state's flagship homelessness services grant program, the Homeless Housing, Assistance, and Prevention (HHAP) grant program. The budget signals that the administration is open to working with the Legislature on additional funding for this program.
• The proposed budget reinforces the Governor's commitment to increased accountability for existing homelessness funding. This includes increased scrutiny of local governments' reporting, regional convenings led by HCD, and increased enforcement through the Housing and Homelessness Accountability, Results, and Partnership Unit.
• There was no further information about the new housing and homelessness accountability website the Governor previewed earlier this week.

Outdoor access

• The budget proposes $6.8 million for the continuation of the California State Library Parks Pass program, which provides free entry to over 200 participating state park units operated by State Parks for checkout to library card holders.
• The budget proposes the following parks and outdoor access investments from the Proposition 4 climate bond:
  • $190 million to create and improve parks in disadvantaged communities.
  • $11 million to improve the safety and accessibility of trails and facilities, increase interpretive information, and complete wildfire preparedness and mitigation projects.

Extreme heat mitigation

• The budget proposes the following investments from Prop. 4 to build resilience to extreme heat:
  • $46.8 million for greening communities by creating and expanding green streets, parks, and schoolyards.
  • $37.6 million to modify or upgrade fairgrounds to enhance communities' emergency preparedness capabilities.
  • $16.1 million to fund projects that reduce the impacts of extreme heat and the urban heat island effect, and build community resilience to extreme heat.
• The budget also proposes an additional $1.5 million in non-Prop. 4 spending for various extreme heat mitigation projects and programs.

Children and child care

• The budget maintains previous funding commitments to implement Universal Transitional Kindergarten fully, expanded after-school and summer programs, and Universal School Meals.

- Caroline Grinder, legislative affairs lobbyist

Housing, Community, and Economic Development

Last year, the Governor and the Legislature slashed over $1 billion in funding to key affordable housing programs, including the Multi-Family Housing Program, Adaptive Reuse Program, and the Foreclosure Intervention Housing Preservation program. These programs are some of the most effective ways to promote affordable housing development in local communities.

Instead of restoring those dollars, the Governor continues to insist that local governments are not doing enough to promote housing and need to be held "accountable" for a lack of construction. Instead of offering ongoing funding to spur housing construction or simply restoring cut spending to effective housing programs, he announced three priorities:

• Reduce Costs. The state should help lower housing construction costs by streamlining processes and removing unnecessary barriers to development, including addressing delays in project approvals and permitting. The state should also pursue policies to reduce costs associated with existing laws that hinder housing production and increase costs and development risks.
• Enhanced Accountability. The state should strengthen mechanisms to ensure jurisdictions meet their state housing obligations and comply with existing laws, including the Housing Accountability Act and Permit Streamlining Act.
• Housing and Transportation. The state should advance policies that remove barriers to infill housing near transit, including efforts to align long-term housing and transportation planning, and further the ability to utilize housing as a mitigation strategy for infrastructure projects.

Cal Cities remains steadfast in the fight to preserve local decision-making and to advocate for ongoing funding for affordable housing as budget negotiations continue this spring. The housing supply and affordability crisis can't be solved unless funding matches the scale of the problem, and a true state-local partnership is forged.

- Brady Guertin, legislative affairs lobbyist

Transportation, Communications, and Public Works

The 2025-26 State Budget maintains the entirety of the transportation funding included in recent budgets. This includes $15.4 billion over multiple years for the following:

• Transit and rail. $7.7 billion for high-priority transit and rail infrastructure projects to improve rail and transit connectivity between state and local/regional services that help ease traffic congestion and reduce greenhouse gas emissions. There is an additional $1.1 billion for the Zero Emission Transit Capital Program.
• Ports terminals. $1.2 billion for projects that improve goods movement on rail and roadways at port terminals, including railyard expansions, new bridges, and zero-emission modernization projects.
• Active Transportation Programs (ATP). $1.1 billion for ATP projects, the Reconnecting Communities Highways to Boulevards Pilot program, and climate adaptation projects to advance equity and health outcomes.
• Grade separation. $150 million for grade separation projects that support critical safety improvements and improve traffic and rail movement by separating vehicle roadways from the rail tracks.
• Clean up. $25 million General Fund for the Clean California Program to provide matching grants to communities with a Clean California Community designation focused on litter remediation and job creation.
• Broadband. The state budget continues to delay investments for last-mile projects, which connect the broadband network to homes until the 2027 budget year.

In addition to providing transportation funding for local streets and roads, bridges, and the state highway system, the Governor's proposed budget contains a five-year infrastructure plan that includes approximately $55.4 billion in state infrastructure investments over the next five years.

The budget also proposes the following water-related infrastructure investments from the state climate bond in 2025-26:

• Dam safety and climate resilience. $231.5 million to the Dam Safety and Climate Resilience Local Assistance Program for competitive grants for projects that support dam safety and reservoir operations, such as funding for repairs, rehabilitation, and enhancements.
• Dam removal and related infrastructure. $8.5 million to remove obsolete dams and modifications to related infrastructure to increase habitat connectivity, build climate resilience for culturally and economically important fisheries, and improve coastal sediment supply for beaches and shorelines.

- Damon Conklin, legislative affairs lobbyist

Public Safety

The Governor's budget includes significant wildfire mitigation and preparedness funding from the climate bond, including:

• Forest health. $82.2 million for projects that improve forest health by significantly reducing fuels, reintroducing beneficial fire, restoring degraded areas, and conserving threatened forests.
• Regional projects. $79.5 million for block grants to support landscape-scale, multi-benefit projects developed by forest collaboratives in high-risk regions.
• Local fire prevention. $59.1 million for the Wildfire Prevention Grants Program to support local projects in and near fire-threatened communities - including fuel reduction, wildfire prevention planning, and wildfire prevention education - with an emphasis on improving public health and safety.
• Wildfire mitigation. $9.1 million for the Wildfire Mitigation Program, which offers financial assistance to vulnerable populations in wildfire-prone areas throughout the state for cost-effective structure hardening and retrofitting to create fire-resistant homes, as well as defensible space and vegetation management activities.
• CalFIRE. In addition to climate bond investments, an additional $137.9 million for the continuation and addition of critical major capital projects, including the replacement of various fire stations, unit headquarters, helitack bases, and air attack bases.

With the passage of Proposition 36 and a retail theft legislative package in 2024, the Governor's budget proposal does not include any major investments toward reducing retail theft, fentanyl, or other related issues. The Governor's proposed budget does note the impact Proposition 36 will have on the prison and parole populations.

• Parole population. Prop. 36 is projected to slightly increase the parole population, which is anticipated to remain relatively stable over the next few years, falling to 33,756 by June 30, 2029.
• Prison population. The Governor's proposed budget noted that even with the expected increase from Prop. 36 the prison population is still expected to go down. For 2024-25 the population is 91,672, a slight increase from previous years. The projected population is expected to decline to 90,998 by 2027-28.

- Jolena Voorhis, legislative affairs lobbyist

Governance, Transparency, and Labor Relations

The Governor's budget includes an increase of $9.1 billion in funding to help secure the future of state pension systems. The budget also includes continued reductions in government operations and cuts to approximately 6,500 vacant positions, along with one-time investments in workforce development programs and upgrades to state technology systems.

Labor and workforce development

• Unemployment insurance loan interest. One-time allocation of $634.3 million from the General Fund to cover interest payments.
• EDDNext. One-time $124.2 million ($62.1 million General Fund) to continue the planning and development of EDDNext.
• Electronic Adjudication Management System. One-time $25.8 million for the Department of Industrial Relations.
• Cal/OSHA data modernization. One-time $18.2 million for the Department of Industrial Relations to upgrade information technology systems and processes.
• Regional career education and training coordination. One-time $4 million from the General Fund for the Labor and Workforce Development Agency to evaluate and expand regional coordination and align workforce programs with employer needs.
• Agricultural Labor Relations Board. $1.9 million to the Labor and Workforce Development Fund to address unanticipated increases in workloads.

Government efficiencies and reductions

• Vacant positions. $1.2 billion over two years of vacant positions will be eliminated, totaling 6,500 jobs.
• Operational efficiencies and reductions. $3.5 billion over two years and ongoing reductions to state operations.

- Betsy Montiel, legislative affairs analyst

Next steps

Even under a different federal administration, this year's budget debate would have been a slog. But with nasty battles already brewing on the sidelines, this year could be even more of a slugfest, as many state leaders move to protect the state's progressive bona fides while tackling ever-escalating housing, infrastructure, and environmental challenges.

Regardless of what happens, lawmakers must pass a balanced budget by June 15. To learn how you can get involved, stay subscribed to Cal Cities Advocate or contact your regional public affairs manager.

Public link

Please use the above public link if you want to share this noodl on another website.